When unconventional monetary policy was conventional

He went on "finally, expansion of the Central Bank's balance sheet through money creation should, in theory, have stimulatory effects, through the so called 'portfolio balance channel'. The idea here is that as the Central Bank purchases securities with bank reserves, investors seek to rebalance their portfolios and in doing so, push up other asset prices and lower risk premiums for borrowers."

He went on "our current thinking is that QE becomes an option to be considered, at a cash rate of 0.25%, but not before that. At a cash rate of 0.25%, the interest rate paid on surplus balances at the Reserve Bank, would already be at zero, given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates".

He continued "we would also need to consider the effects on the market function. We are conscious that government securities play a crucial role as collateral in some of our financial markets. Given the limited supply of government debt on issue, the Reserve Bank and APRA, have already had to put in place, special liquidity arrangements for the banking system. We are also conscious that the Australian government's fiscal position, means that the gross stock of government debt is projected to decline, relative to the size of the economy over the years ahead. These considerations are not impediments to undertaking QE, but we would need to take them into account."

When will the RBA act?

On Tuesday 3 December, the RBA decided to leave the cash rate unchanged. In his Statement following this decision, the Governor noted "after a soft patch in the second half of last year, the Australian economy appears to have reached a gentle turning point. The central scenario is for growth to pick up gradually to around 3% in 2021".

On Wednesday 4 December, the release of the September Quarter National Accounts showed growth of only 1.7%, in Australian real GDP for the year to September 2019. This would suggest the economy is weak. At the same time, the same set of National Accounts showed growth in nominal GDP of 5.5%, for the year to September. The Accounts also showed growth in real net national disposal income of 4.8%, for the year to September. These numbers would suggest that the economy is strong.

Conclusion

The RBA is prepared to introduce QE, when it is necessary. When it is necessary, the RBA will begin purchasing Australian Treasury bonds, on the secondary market. This process will only begin when the Australian cash rate has fallen to 0.25%.

The RBA does not believe that this action will be necessary for the Australian economy in the near future. I believe it will be inevitable in the long term. We have only to find out when.